Join the conversation #CBIPwC
Optimism within the financial services industry continues to decline, very much in line with previous fourth quarters and despite strong business performance. Reflecting on our survey throughout 2017, our latest results help highlight some of the underlying trends that are impacting the financial services sector. Brexit remains front of mind for firms with 9 in 10 expecting it to challenge the UK’s status as a leading financial centre, however this tells only part of the story. Looking beyond the immediate challenges of today firms are developing their wider strategic priorities and focusing on opportunities that will help shape their success over the long term.
Business performance has remained positive, with increasing profitability and business volumes across all market segments excluding overseas customers, reflecting firms’ concerns over the impact of Brexit on future abilities to easily trade overseas. Looking ahead, firms expect levels of demand and regulation to limit their ability to increase business over the next 12 months. Strong competition, most notably from within a firm’s own industry continue to impact business, with many still targeting domestic customers to help drive growth.
High levels of capital expenditure on IT is expected to continue, helping increase efficiencies, expand capacity and replace aging systems. Interestingly, this lies in contrast to a sharp decrease in investment toward land, buildings and supporting plant, vehicles and machinery, with almost three quarters of respondents citing inadequate net return on investment as barriers to investment.
Investment in people and the changing nature of the skills required are transforming the way the industry thinks about the workforce of the future. Continued digitisation of processes and services is leading to more expenditure on training and also demand for more specialised staff. Thinking more broadly at the UK’s position as a FinTech hub, respondents cite the need to attract talent and the ability to influence regulation as key to its success; a cornerstone of our recent vision for a transformed, world leading industry with TheCityUK.
Building on the attributes of our recent report with TheCityUK, the results of our survey underline the need for firms to capitalise on the positive business conditions and plan ahead to ensure their future success. To find out more about our vision for a transformed, world leading financial services industry click here.
Do you want to take part and share your experiences in our CBI & PwC quarterly Financial Services Survey?
Sentiment amongst banks has continued to decline for the third consecutive quarter, now in line with figures following the financial crisis in 2008 and fuelled by flat trading conditions, profitability and a sharp spike in operating costs. Interestingly, the rise in operating costs is the highest across all of the financial sectors, most likely a result of changes being made to plan for Brexit and the duplicative cost and effort of ring-fencing.
Investment in IT to expand capacity and improve efficiencies continues to drive the largest expected capital expenditure over the next year and now far exceeds investment in land, buildings and machinery, which both decreased significantly in the last quarter.
Regulation and levels of demand continue to present the largest challenge to growth for the banking sector over the next 12 months. Following a period of significant regulatory change, firms are looking ahead at new opportunities to grow their business. Diverting spend in regulation toward advances in IT and the acquisition of new customers.
Continuing the trend from the last quarter, optimism amongst the insurance industry is divided, with UK life insurers the most upbeat, spurred on by positive volumes of business, profitability and significant transformation projects guided by renewed clarity in the future direction of their industry.
Similarly, general insurers foresee good business prospects, but with less optimism than their life counterparts, limited by the availability of talent and expected disruption of Brexit impacting firms' abilities to transact with overseas clients. People, talent and automation appear to be key pillars for growth with many investing in training and IT to better enable their sales forces to grow revenue.
Despite continued growth in profitability, insurance brokers are more cautious than the first half of 2017. Balanced volumes of business and increasing levels of competition and regulation have encouraged insurance brokers to really consider their future strategies and growth opportunities over the coming years. Led by a changing business model based on insight, firms are continuing to invest heavily in training and authorising expenditure that helps increase efficiencies, provide new services and reach new customers.
Insurers are busy implementing and taking steps to transform the way they do business as an industry with a high likelihood of disruption. Looking beyond the immediate challenges of today, firms are looking at the opportunities of technology including AI and automation to not only reduce costs and increase efficiency, but also reach and engage new customers. Investment in these areas will prove key as competition amongst firms and other industry participants increases and the opportunity to transact overseas becomes more complex.
On the surface, little appears to have changed since the last survey. Optimism has continued to increase within the asset management sector, albeit at a slower pace than the past 12 months. Despite uncertainty in the market, firms reported increasing volumes of business, fee income and profitability, a strong result when compared to the FS industry as a whole. However the sector painted a somewhat more downcast picture for the next three months, especially regarding business volumes generated from private individuals and overseas customers.
Spurred by favourable business conditions, firms continue to invest in technology and their people to provide new services and manage the ongoing demands of existing and new regulations. In turn, experiencing larger than industry average jumps in operating costs and cost per transaction.
Regulation is signposted by asset managers as the largest factor limiting their ability to increase business over the next year, with the industry juggling post Brexit readiness with the implementation of General Data Protection Regulation (GDPR), Senior Managers Regime (SMR), US tax reform, MiFID II post implementation and the recently proposed ESMA review. To help drive growth firms are looking to harness the power of digital and AI to obtain scale and optimise the use of the vast amounts of data generated by these new regulations.